That’s not a misprint. You can qualify for a 0% tax rate on some or all of your long-term capital gains realized in 2013. This unique tax break, recently extended by the American Taxpayer Relief Act (ATRA), isn’t necessarily off-limits to taxpayers who are doing OK financially.
Strategy: Figure out how much capital gain you might fit under the threshold. The 0% rate applies to taxpayers who end up in the 10% or 15% regular income tax brackets.
For instance, you may qualify for preferential tax treatment if your business incurs a loss this year or you defer a substantial amount of income to future years. Alternatively, you might shift some of your capital gain assets to your children or grandchildren who are eligible for the 0% tax rate.
Here’s the whole story: As part of the “Bush tax cuts,” the maximum tax rate on net long-term gain was lowered from 20% to 15%, beginning in 2003. For taxpayers in the two lowest tax brackets, the rate was reduced to 5%. Subsequent extensions and modifications cut the rate for these taxpayers to a rock-bottom 0% through 2012.
Now ATRA has permanently extended the 0% tax rate for long-term capital gains. The 15% rate was also extended, but single filers with taxable income above $400,000 and joint filers above $450,000 face a maximum 20% rate for 2013 and thereafter.
It’s strictly a numbers game for the current year. If, for whatever reason, your income drops below the cutoff point, you can benefit from the 0% rate. For 2013, the threshold is $36,250 for single filers and $72,500 for joint filers (see chart below).
Example: Suppose you’re self-employed, a joint filer and normally in the 33% bracket. However, due to unusual circumstances, you expect your self-employment income in 2013 to be only $50,000.
Plus, you figure you’ll be able to cut your taxable income to $20,000 through itemized deductions such as mortgage interest, property taxes and gifts to charity.
This gives you plenty of tax room to maneuver on sales of securities or other assets. For instance, assume you sell appreciated stock you’ve owned for 10 years at a $50,000 gain. Because your total taxable income of $70,000 ($20,000 + $50,000) is still below the cutoff of $72,500, the entire long-term gain is effectively tax-free!
Note that it doesn’t have to be an all-or-nothing proposition. For instance, say that your taxable income before counting capital gains is $52,500 instead of $20,000. In that case, $20,000 of the gain from the sale of stock ($72,500—$52,500) qualifies for the 0% rate. The remaining $30,000 of gain is taxed at the 15% rate, for a total tax of $4,500—still a pretty good deal.
If you have absolutely no shot at the 0% rate this year, you might shift appreciated capital gain assets like stocks and mutual fund shares to low-taxed family members. The transfers can be sheltered from gift tax by the annual gift tax exclusion of up to $14,000 per recipient ($28,000 for joint gifts made by a married couple). Any excess is covered by your annual lifetime gift tax exemption ($5.25 million in 2013).
However, under the “kiddie tax,” investment income above $2,000 received in 2013 by dependent children up to age 24 can be taxed at the parents’ top rate. Also, shifting too much income might affect college aid eligibility.
Tip: Finally, don’t forget that the 0% capital gains rate only applies to assets held longer than one year. Short-term gains are taxed at ordinary income rates.
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